Startup and organizational costs in a partnership technical termination.

• Author: Schwartzman, Randy A.

The Treasury Department issued Prop. Regs. Sec. 1.708-1 (REG-126285-12) to clarify that no immediate deduction of unamortized startup and organizational expenses is available when partnerships undergo a "technical termination" under Sec. 708(b)(1)(B), as opposed to an actual termination under Sec. 708(b)(1)(A). Once the proposed regulations are finalized, they will be effective retroactively for technical terminations that occur on or after Dec. 9,2013.

Technical Termination

A technical termination occurs when there is a sale or exchange of 50% or more of a partnership's capital and profit interests within a 12-month period. The technical termination rules are not implicated, however, when a 50%-or-more change occurs as a result of contribution or redemption transactions. Also, these rules do not apply under Sec. 708(b)(1)(A) when a business actually terminates, either by ceasing operations (i.e., winding down and shutting its doors for business) or when an interest in a multimember limited liability company (LLC) is sold, exchanged, or otherwise converted to a single-member LLC (as provided for in Rev. Rul. 99-6).

Under Regs. Sec. 1.708-l(b)(4), if a partnership is terminated by a sale or exchange of an interest, the "old" partnership is deemed to have contributed all of its assets and liabilities to a "new" partnership in exchange for an interest in the new partnership. Immediately after the contribution, while still in existence for legal and other nontax purposes, the "old" partnership is deemed to have terminated. The terminated partnership is then deemed to have distributed interests in the "new" partnership to the partners in proportion to their respective interests in the terminated partnership in its liquidation.

If the technical termination occurs on a date other than the end of the tax year, the partnership that technically terminates is required to file two short-period returns. The first return, for the "old" partnership, runs from the beginning of the tax year to the end of the day of the transaction that triggered the technical termination. The second return, for the "new" partnership, begins on the day following the technical termination and runs until the end of the partnership tax year. Inasmuch as the partnership is deemed to be new for tax purposes, it must select new accounting methods and make new elections (e.g., the recurring-item exception for the "all events" test under Sec. 461(h)(3) or the election to ratably...